Germany, Model Economy Du Jour

All Germans laugh when I speak German. And when they’re done laughing, sooner or later, they tell me how they cheat on their taxes. It’s such a common subject, discussed in such great detail and with such heartfelt passion, that I get the feeling it’s their national sport, and I go online to check the scores.

However, they have good economic reasons to cheat. Here is a sampling:

The maximum personal income tax rate of 45% kicks in at €250,000 ($375,000), whereas the next step down, 42%, kicks in at €54,000 ($73,000). It’s not just the rich that are getting whacked.

On top of that, they have the infamous Solidaritätszuschlag—lovingly called Soli—of 5.5% of the income tax due. Introduced in 1991 to fund the rebuilding of East Germany after reunification, it was supposed to be temporary, but it’s still alive and kicking today, 20 years later, though it no longer has anything to do with East Germany.

You also must have health insurance—public in the lower income brackets, private and very expensive in the higher brackets, based on the “solidarity principle.” People with high incomes pay more, often a lot more, than people with low incomes. Which leads to the absurd situation that my health insurance in the U.S., expensive as it is, seems outright reasonable compared to what I’d pay in Germany. Now, if I were poor, it would be the opposite. Or rather, over there I’d have pretty decent healthcare, and here I’d have nothing.

And you pay your retirement contributions, which vary. If you’re employed, they’re mandatory.

And no, you’re not done paying yet. If you belong to a religious organization (Catholic Church, Protestant Church, and others), you’ll be whacked with the “church tax.” An additional 8% or 9%, depending on the State, is deducted from your pay and goes to the Ministry of Finance, which distributes it. Rather than a tax-deductible contribution, it’s an outright tax. That’s why so many fence-sitters have left the church (yes, leaving the church is an official procedure … you can’t just stop going and assume it’ll allow you to escape the church tax).

So, you’re a salaried employee, single with no kids, belong to a religious organization, and make, lucky you, €100K a year: Every time you look at your paycheck, you just want to sit down and cry.

And then, when you want to spend what little is left of your income, you have to face the scourge of all shoppers: a 19% Value Added Tax (VAT, rhymes with SPLAT). Shoppers in New York and San Francisco, rejoice! You’ve got a bargain!

In addition, there are all sorts of other taxes like the notorious Kaffeesteuer (yes, that’s correct, a coffee tax). If you bring a few kilos of your favorite Italian espresso back from vacation, or if you buy it on eBay and don’t voluntarily declare it, they can nail you for tax fraud, and they’re not kidding. Practically everything that’s fun or sinful or useful is massively taxed: real estate, cars, tobacco, gasoline, alcohol, etc.

All of which produce four glaringly obvious results:

1. Pandemic cheating by absolutely everyone who can—many have to cheat just to make ends meet.

2. Repressed consumer spending—it’s hard to shop when the government is trying to take almost everything you make.

3. Exports doped by high production and low consumption at home—but any retrenchment of foreign demand has a magnified effect on German GDP.

4. No wiggle room for additional taxes, to bail out Italy for example, without debilitating economic consequences—which just might bring the house down.

This tax model has turned Germany into a much envied export powerhouse—for years the number one exporter in the world, it has recently been demoted by China to number two—while the American tax model has turned the U.S. into a consumer powerhouse. They produce and export, we consume and import. They have one of the largest trade surpluses in the world, we the largest trade deficit. They have their fiscal house in order (well, kind of), and we’re getting ever deeper into a morass. But we’re having all the fun.